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Russia Sparks Fears of World Wheat Shortages

by Hugh Stringleman

Russia has suffered a savage cut of one-third in its 2010 grain production, expected to be down to 65 million tonnes from a forecast 95 million tonnes. Wheat is down 27% to 45 million tonnes, most of which will now be required at home for human and livestock consumption.

The effect will be to cut exports of wheat to nearly zero and trigger a looming worldwide shortage. Already the world price of wheat has risen 66% over the past two months. As Russia has been in recent years the third-largest wheat exporter, this will have huge knock-on effects in world markets for grains, feedstuffs, meat and dairy.

The government has slashed its grain output forecast and will reduce its exports to 2.0-4.5 million tonnes of grain this year compared to 21.4 million tonnes last year.

But despite the crisis, which is expected to leave many farms close to bankruptcy, Prime Minister Vladimir Putin announced that there would be no domestic shortage of grains for the country's own purposes this year. He has already banned any wheat exports until December 31.

Flooding in Pakistan and China, drought in Canada and locusts in Australia have contributed to a growing fear that climate change is biting into food security.

Fortunately, US farmers are anticipating a record crop this year. The US Department of Agriculture has forecast wheat exports to jump 36% in reaction to higher prices, and in a rare move raised its one-month-old harvest forecasts and price forecasts for several major US crops, including wheat, corn, and soybeans at the same time.

United Nations officials have dampened down talk of grain shortages, by pointing to the US crop expectations and the reserves of 36 million tonnes in storage in the US, about twice the level of recent annual Russian exports.

However, should the USDA estimates begin to come down as the harvest proceeds, then world prices will rise and food fears will be renewed.

The UN worries that producing countries will ban exports of cereals and rice, as they did in 2007-08, thereby creating panic in developing countries. Fortunately rice reserves have recovered also, to about 90 million tonnes, with 40 million tonnes in China and 20 million in India.

Volatility in world prices for grains, meats, dairy products, stock foods and energy sources is now the new normal. But that doesn't automatically flow through to higher supermarket prices.

Since the soaring prices of 2007-08, followed by the steep falls of 2008-09, hedging of forward prices by the major food companies is now widespread.

Companies like Tyson Foods, General Mills, Kraft and Kellogg now lock the prices of their grain needs for 12 months or more.

That may insulate them from the downside of soaring grain prices, leaving them free to use the news of such peaks to lift their sales revenues.
Rabobank said the total Russian grain market would be in deficit this year, putting a big strain on its livestock industries.

It said Russia had been building up its chicken and red meat industries in recent years to reduce imports.

"We believe that low feed grain availability has been the primary driver behind the calls for a ban on grain exports," the bank said.

India is well insulated from the global wheat crisis because it produces more wheat than it consumes and it has a virtual ban on exports. It is the world's second largest producer after China and has produced more than 80 million tons of wheat in each of the past two years, according to the Indian Ministry of Agriculture. India consumes around 70 million tons of wheat per year.

Commentators believe its reserves of wheat may total 50 million tonnes, although authorities claim 15M tonnes.

Storage is a big problem and rotting and wastage results from water damage during monsoons. This is unacceptable politically in a country where millions are starving. So too is food price inflation, which drives the cost of subsistence purchasing beyond the reach of many.

At the beginning of August, the Food and Agriculture Organisation (FAO) cut its 2010 world wheat forecast by 4% to 650 million tonnes.
But the FAO said the world wheat market remains far more balanced than at the time of the crisis, and that fears of a new global food crisis are not justified at this point.

"After two consecutive years of record crops, world inventories have been replenished sufficiently to cover the current anticipated production shortfall."

Even more importantly, stocks held by the traditional wheat exporters, the main buffer against unexpected events, remain ample, the FAO said.